Magazine

The Bear Is on a Buying Spree

November 11, 2001

Not long ago, many European and American investors shunned Mikhail B. Khodorkovsky as the bad boy of Russian business--accusing him of discriminating against minority shareholders in his companies. But now the 38-year-old Khodorkovsky, chairman of Yukos, Russia's second-largest oil company, is becoming a player on the Westerners' own turf. In mid-October, Khodorkovsky snapped up 22% of Anglo-Norwegian engineering group Kvaerner for $30 million and agreed to buy two of its units for $100 million in cash. The moves, which could help bail out the debt-ridden European company, are just the beginning of Yukos' forays abroad. "The units will be very useful for the work we are already beginning in acquiring more foreign assets," Khodorkovsky says. "They give us the international experience we don't have."

Russian business barons are starting to prowl for assets around the globe (table). Joining Yukos is the country's No. 1 oil company, Lukoil, which is looking to buy a refinery in the U.S. That would follow Lukoil's $71 million purchase last year of 1,300 Getty gas stations in America. Meanwhile, metals giant Norilsk Nickel, which produces 20% of the world's nickel and 50% of its palladium, is scoping out investments in Asia and America.

LEARNING FROM MANAGERS. The hunt for acquisitions overseas is a sign that Russia's biggest companies see their futures outside their huge domestic marketplace. "We used to concentrate on our position in Russia," says Vladimir O. Potanin, president of the Financial-Industrial Group Interros, which owns Norilsk Nickel (NLKNY). "But now we realize Norilsk Nickel has to become an international company to survive." Norilsk Nickel, which like many other Russian commodities producers is flush with cash after two years of soaring prices, is studying the feasibility of expanding into nickel mining in the South Pacific island of New Caledonia. The company may purchase a controlling stake in a proposed $800 million joint venture with Canadian-Australian miner Argosy Minerals Inc. (AGYMF) Overall, Potanin wants 20% of Norilsk Nickel's assets to be based overseas within five years.

Acquisitions in the West have an added benefit for companies still struggling to break free from Soviet practices--they can provide valuable management expertise. That was key to Lukoil's strategy in buying Getty Marketing Petroleum Inc. and its filling stations in the U.S. With the purchase, Lukoil acquired Getty's training center at its headquarters in Jericho, N.Y. Dozens of Lukoil (LUKOY) managers will soon be visiting to learn how to make Lukoil's retail network in Russia more efficient.

In a similar manner, Russia's Alfa Group, a conglomerate that includes interests in oil, banking, and commodity trading, moved earlier this year to buy Marc Rich Investment. Alfa wanted to plug into the Swiss-based commodities operation to gain access to the former fugitive's contacts--as well as the company's estimated $7.5 billion in revenues and 300 employees. The deal fell through, but Alfa Group's Chairman Mikhail Fridman says he continues to be on the lookout. "We will be moving more aggressively into Western Europe," he says.

Russian tycoons are aware that the international business community remembers them chiefly for their role in shareholder scandals. The Russian execs want to turn that view around, for good reason. Without greater transparency and better management, Russian companies won't be able to tap international markets. And the Russians won't be welcome as investors when they bid on non-Russian companies.

Take Yukos. In 1999, the company enraged minority shareholders by issuing new shares that diluted their stakes in the company. After a fierce legal dispute, Khodorkovsky bought out Yukos' largest minority shareholder, U.S. millionaire Kenneth Dart, for an undisclosed sum at the end of that year. Since then, he has embarked on a campaign to open his company to investor scrutiny. This year, Yukos became the first Russian oil major to release quarterly results according to international accounting standards.

Yukos' move on Kvaerner could be a new test. Norwegian businesspeople fear Yukos might force a breakup of the company, which employs 35,000. But Khodorkovsky insists they shouldn't worry. "It's normal for a Western company to buy Russian assets, so why not the other way around?" he asks. The world has certainly changed. By Catherine Belton in Moscow